E-Procurement Profit Potential: Anyone's Guess

Technology companies can make plenty of money providing electronic procurement solutions to state and local governments, but no one can say how much or how fast the money will start flowing.

Estimating the potential revenue stream is tricky, not just because public-sector e-procurement still is in its infancy, but also because most governments are expected to ask for self-funding systems that require little outlay of public resources. Instead, the vendors will receive transaction fees paid by suppliers each time government buyers make online purchases. Thus, how quickly or how often government buyers will use e-procurement is an open question.

"Companies won't make back their money in the first year," said Basil Nikas, chief executive officer for PublicPurchasing.Net, of Bethesda, Md., a company that hopes to tap into the promising e-procurement largess. "With the transaction model, it's definitively a long-term investment."

American Management Systems Inc. of Fairfax, Va., last month announced a partnership with Ariba Inc. to create Buysense.com, an online market that brings together government purchasers and suppliers.

Under this model, each government user might pay an annual subscription of $200 to $400, depending on the total number of users, said Bill Kilmartin, a vice president with AMS. Vendors will pay a transaction charge of $1 to $2 each time a purchase order is made, and perhaps another small fee based on the value of the purchases.

So just how much money can be made with this model?

A lot, according to Kilmartin. The state of Washington, for example, is looking for an e-procurement system that eventually will have up to 10,000 users, with nearly 500,000 purchase orders or transactions annually and $151 million in purchasing volume, he said.

Nikas estimated that a customer base of only five midsize cities, five counties and five states could generate $100 million a year for a company.

"There's enough potential business out there to support a lot of vendors in this market," he said.

Systems integrators have taken notice. Officials with KPMG International, Andersen Consulting and Science Applications International Corp. said they view e-procurement as an important emerging market and are teaming with different software solutions providers.

"We see e-procurement as a very viable business area for SAIC," said Jane Van Ryan, a spokeswoman for the company.

Financial analysts are just as bullish. Companies in the private sector have gained immediate savings when moving to online purchasing, said Todd Weller, an electronic commerce analyst with Legg Mason Wood Walker Inc. in Baltimore. He cautioned, however, that the transaction-based model for providing e-procurement solutions still must be proved.

Brace Brooks, a senior equity analyst who follows AMS for Johnston, Lemon and Co. Inc. of Washington, said the public sector can achieve the same efficiencies and benefits that have been seen in the private sector.

"This is the model of the future. Five to 10 years from now, this is the way business will get done," Brooks said. "Business-to-business e-commerce truly offers some steak with the sizzle."